Credit Union to Mutual Conversion: Do Interest Rates Diverge?

Heinrich, Jeff, Kashian, Russ, Contemporary Economic Policy

I. INTRODUCTION

In a recent directive, the National Credit Union Administration (NCUA) proposed that a converting credit union (CU) includes the following disclosures in each written communication it sends members regarding conversion: "Credit union directors and committee members serve on a volunteer basis. Directors of a mutual savings bank are compensated. Credit unions are exempt from federal tax and most state taxes. Mutual savings banks pay taxes, including federal income tax. If [insert name of credit union] converts to a mutual savings bank, these additional expenses may contribute to lower savings rates, higher loan rates, or additional fees for services."

This powerful paragraph intends to warn CU members of the consequences of mutualization. However, this statement is without citation or evidence by the regulators. It could be argued that without evidence supporting this claim, the NCUA is simply protecting its turf and conducting an argument that retains membership. As a result, several considerations demand examination. All relate to the issue of member/owner benefits and include considerations of the financial benefits associated with interest rates on deposits and loans. First, do recently converted CUs charge lower loan interest rates and/or pay higher dividend rates on savings than CUs? Second, can these differences be attributed to the compensation of directors or the tax status of the institution? The second question is beyond the scope of this study. We approach the first by not just comparing banks rates to CU rates but also analyzing the interest rate differentials between CUs and institutions that converted from CU charters to for-profit banking institution charters.

Following the passage of the Credit Union Membership Act of 1998, the conversion of CUs to banks became easier. The conversion of CUs to mutual status is a development that has the attention of both researchers and the public. One reason is the size of the industry in terms of institutions. There are currently over 8,000 CUs in the United States. This is more than 10 times the number of remaining mutual thrifts. Another reason is the timing of this development. While this effort by CUs to convert into mutuals is picking up, it is occurring as the effort to demutualize the historic mutuals has past its zenith (Kashian and Monaco, 2003). This dichotomy (the intriguing development of conflicting conversions) calls into question the benefit of mutualization in an era of demutualization.

Over the past 10 yr, roughly 30 CUs in the United States have converted to mutual savings banks. The majority of these institutions have subsequently converted to stock-owned institutions. This activity, while very limited in terms of number of institutions, has been hotly debated. Opponents of this activity say that in almost every case, this process has been motivated by insider greed because it results in an economic transfer of wealth from CU members to insiders, as directors and top managers of the erstwhile CU take advantage of the initial offering of stock. Further, some argue that CU members are not properly informed of the negative consequences of the conversions. Advocates, on the other hand, say that converted CUs can maintain and even improve their level of service to members. These conversions, they argue, increase flexibility due to fewer regulatory constraints and make institutional growth easier.

CUs differ from mutual savings banks in several ways. First, CUs operate on a "one person one vote" principle in which each member has an equal vote in electing the board of directors. Mutual savings banks use weighted voting where depositors exercise a number of votes proportional to the dollar amount of deposits they hold at the bank. CU membership requires a share savings account, while mutual savings banks customers can participate as savers, borrowers, or both. CU membership is only available to individuals from a defined group of people, while mutuals can have anyone. …

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